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Conyers David Cooke

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Comment: Preserving partners’ limited liability in foreign jurisdictions

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David Cooke (pictured), a partner in the corporate department of Conyers Dill & Pearman in Bermuda, says that limited partners could find themselves exposed to unlimited liability in jurisdictions other than that in which the limited partnership is established – but a recent legal development in Bermuda can resolve the issue.

When is a limited partner’s liability potentially unlimited? One answer may be whenever the limited partnership operates outside its jurisdiction of formation – unless care is taken at the time of its formation.

Limited partnerships are established in many jurisdictions, often for the purpose of investing or carrying on business in another jurisdiction. The essence of a limited partnership is that the liability of the limited partners is limited to the amount that those partners have contributed or agreed to contribute.

What many limited partners do not realise is that the limitation of liability afforded them under the laws of the jurisdiction in which the limited partnership was formed may not be given effect under the laws of other jurisdictions in which the partnership may do business. Nor are many involved in setting up the structures aware that Bermuda limited partnerships offer a simple way of ensuring limited liability in foreign jurisdictions.

In many common law jurisdictions including England, the provisions of the laws of an overseas jurisdiction limiting the liability of partners of a limited partnership may not be enforced if the partnership is not a separate legal entity – as is often the case. This is a result of the application of conflicts of laws principles.

Those principles often distinguish between partnerships that are separate legal entities and those that are not. Where the partnership has separate legal personality under the laws of the jurisdiction where it is established, the law of the foreign jurisdiction will generally give effect to the legal incidents that attach to the entity under the laws of the formation jurisdiction, such as limited liability of its partners.

Where the partnership does not have separate legal personality under the laws of the formation jurisdiction, the law of the foreign jurisdiction will generally view the partnership as simply a contractual relationship between the partners. Accordingly, while the law of the foreign jurisdiction may recognise that the laws of the formation jurisdiction govern issues arising between the partners, it will not necessarily apply its laws to rights and obligations arising between partners and third parties under the laws of the foreign jurisdiction.

Put another way, if the partnership is a separate legal entity, the limitation on its partners’ liability will be seen as a constitutional characteristic inherent in the entity wherever it does business. However, if the partnership is not a separate entity, such matters will be viewed as contractual matters that are not necessarily imported into dealings between the partnership and third parties in another jurisdiction.

For those structuring new deals (or restructuring old ones), it is fairly simple to avoid this issue if a Bermuda limited partnership is used – the limited partnership can simply elect to have separate legal personality. The ability to elect separate legal personality is a relatively recent development under Bermuda law, having become possible for the first time in 2006, and Bermuda is one of only a few offshore jurisdictions where this is possible.

The procedure is quite straightforward, merely requiring an election at the time that the limited partnership is formed. Once this is made, the partnership will be regarded as a separate legal entity with the power to own and deal with its property separate from its partners. Such an election, however, is irrevocable once made.

When forming a limited partnership, the focus is usually on limiting liability under the laws of the formation jurisdiction. For example, great care will often be taken to ensure that limited partners are not able to participate in management of the partnership in a way that would jeopardise their limited liability.

Often, however, very little thought is given to potential liability in other jurisdictions where, arguably, the partnership and its partners are more likely to incur liability. By utilising a Bermuda limited partnership that elects separate legal personality, the limited partners can enjoy limited liability at home and abroad.

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